Freddie Mac posted 30-year fixed mortgage rates dropped 4 bps to 6.43%, a
24-week low but up 69 basis points from one year ago. Fifteen-year fixed mortgage
rates fell 5 bps to 6.11%, 79 bps higher than a year earlier. One-year adjustable
rates declined 3 bps to 5.60%, an increase of 114 bps y-o-y. The Mortgage Bankers
Association Purchase Applications Index jumped 5.3% (2-wk gain of 9.1%) this
week to a 9-week high. Purchase Applications were down 19% from one year ago,
with dollar volume down 24%. Refi applications added 0.1%. The average new
Purchase mortgage increased to $216,000, and the average ARM jumped to a record
$369,900.

Total Money Market Fund Assets, as reported by the Investment Company Institute,
increased $4.5 billion last week to $2.230 Trillion. Money Fund Assets have
increased $173 billion y-t-d, or 11.8% annualized, with a one-year gain of
$263 billion (13.4%).

Total Commercial Paper gained $4.1 billion last week (6-wk gain of $74.2bn)
to a record $1.864 Trillion. Total CP is up $223 billion y-t-d, or 19.1%
annualized, while having expanded $263 billion over the past 52 weeks (16.5%).

Fed Foreign Holdings of Treasury, Agency Debt added $1.8 billion to a record
$1.682 Trillion for the week ended September 13th. "Custody" holdings were
up $163 billion y-t-d, or 15.1% annualized, and $222 billion (15.2%) over the
past 52 weeks. Federal Reserve Credit dropped $5.6 billion to $826.5 billion.
Fed Credit is now about unchanged y-t-d. Fed Credit is up 3.2% ($25.9bn) over
the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's
Alex Tanzi - were up $547 billion y-t-d (19.0% annualized) and $647 billion
(16.4%) in the past year to a record $4.593 Trillion.

Currency Watch:

September 12 - Bloomberg (Mark Drajem and Shamim Adam): "A 'disorderly' drop
in the dollar is the biggest risk to world financial markets, the International
Monetary Fund said, urging policy makers to prepare and act quickly when asset
prices slump. Investors are buying U.S. bonds under the assumption that the
dollar won't slide, and a drop in the currency might turn into a rout as foreign
investors and central banks move to cut losses, the global financial watchdog
said..."

The dollar index was little changed at 85.66. On the upside, the New Zealand
dollar gained 4.0%, the Paraguay Guarani 1.9%, the Hungarian forint 1.6%, the
Iceland krona 1.4%, and the Polish zloty 1.1%. On the downside, the Croatian
kuna fell 1.1%, the Belize dollar 1.0%, the Swiss franc 0.7%, and the Singapore
dollar 0.6%.

September 13 - Bloomberg (Masahiro Hidaka and Lily Nonomiya): "Bank of Japan
board member Atsushi Mizuno said policy makers remain committed to gradually
raising interest rates even after recent signs of slower economic growth and
lower-than-expected inflation. 'Things are in line with our scenario' that
prices are rising and the economy is expanding, Mizuno said...'I want to emphasize
that that means fine adjustments will continue to be made to interest rates.'"

September 12 - Bloomberg (Toru Fujioka): "Japan's producer prices rose at
the fastest pace in 25 years... An index of prices that companies pay for energy
and raw materials such as iron ore increased 3.4 percent in August from a year
earlier..."

September 13 - Financial Times (Michiyo Nakamoto): "Japan's big banks are
coming out of their shells and taking the plunge into overseas markets again.
After a decade that saw the Japanese banks retreat into their home market to
deal with mountains of bad loans, this year has seen a number of small but
significant steps by Japanese banks venturing into neighbouring countries in
Asia... While the moves are cautious, they represent a turning point for Japan's
big banks, which have spent the best part of the past decade focused on resolving
the bad loan crisis at home."

September 13 - Bloomberg (Jason Clenfield): "Japan's current account surplus
widened in July, as overseas demand for automobiles increased and companies
brought home profit from abroad. The surplus rose 7.1 percent to 1.81 trillion
yen ($15 billion) from a year earlier..."

China Watch:

September 11 - Bloomberg (Nerys Avery and Yanping Li): "China's trade surplus
rose to a record for the fourth straight month in August as exports reached
an all-time high... The gap widened to $18.8 billion last month from $14.6
billion in July... Exports surged 32.8 percent in August from a year earlier,
the biggest gain since January 2005, while imports jumped 24.6 percent, the
largest increase since February..."

September 13 - Bloomberg (Nerys Avery): "China's industrial production rose
at the slowest pace in 17 months as government curbs on investment began to
cool the world's fastest-growing major economy. Output at manufacturers, mines
and power plants climbed 15.7 percent in August from a year earlier to 735.6
billion yuan ($92.5 billion), the second-highest on record..."

September 14 - Bloomberg (Nerys Avery): "China's investment in factories and
real estate slowed for a second straight month in August, the National Bureau
of Statistics said... Fixed-asset investment in towns and cities climbed 29.1
percent through August from a year earlier...after rising 30.5 percent in the
first seven months..."

September 13 - Bloomberg (Irene Shen): "Office rents in Shanghai's financial
district may surge 27 percent to a record by the end of next year as overseas
banks expand in the world's fastest-growing major economy, Jones Lang LaSalle
Inc. forecast."

September 14 - Bloomberg (Shamim Adam): "The International Monetary Fund raised
its 2006 growth forecast for Asia excluding Japan, saying economies around
the region are benefiting from the expansion in China and India. The IMF predicts
Asian economies excluding Japan will expand 8.3 percent this year, a 0.4 percentage
point increase from its April 19 forecast..."

September 12 - Bloomberg (Paul Basken): "South Korea and other Asian nations
are outpacing the U.S. and Europe in grade-school and university education,
potentially threatening Western economic dominance, the Organization for Economic
Cooperation and Development reported. The U.S. spends more on primary and secondary
education than most developed countries, yet has larger classes, lower test
scores and higher dropout rates..."

September 12 - Bloomberg (Cherian Thomas): "India's industrial production
grew in July at the fastest pace in a decade... Production at factories, utilities
and mines rose 12.4 percent from a year earlier..."

September 11 - Financial Times (Amy Yee): "India's fast-growing car industry
hopes to quadruple total sales to $145bn over the next decade through a plan
that seeks to boost research and development and increase exports... The sector
is targeting 16 per cent annual growth to boost revenues to $145bn by 2016,
or 10 per cent of GDP, according to a plan unveiled last week... In the next
10 years the auto industry will require $35bn-40bn of investment, or four times
the total investment of the last 16 years, said Anand Mahindra, managing director
of truck and tractor maker Mahindra & Mahindra."

September 13 - XFN: "South Korea's jobless rate slowed to 3.4% in August from
3.6% a year earlier as the telecom, financial, construction and service sectors
hired more workers, the National Statistical Office said."

Unbalanced Global Economy Watch:

September 13 - Bloomberg (John Fraher): "Average global salaries will rise
more than inflation next year as faster economic growth boosts pay demands
in countries from China to Paraguay, a survey by Mercer Human Resources Consulting
showed. Pay will increase 5.9 percent on average around the world in 2007,
1.9 percentage points above forecast inflation, said Mercer... In China, nominal
pay will jump 7.2 percent..."

September 12 - Bloomberg (Greg Quinn): "Canadian employers' hiring intentions
for the fourth quarter rebounded to match a five-year high set between April
and June, led by record demand for construction workers, according to a poll
by Manpower Inc."

September 12 - Bloomberg (Craig Stirling): "U.K. inflation unexpectedly quickened
in August to match the highest level in nine years, strengthening the case
for an increase in interest rates in Europe's second-biggest economy. Consumer
prices rose 2.5 percent from a year earlier..."

September 13 - Bloomberg (Laura Humble): "Unemployment in the U.K., Europe's
second-biggest economy, fell the most in more than a year in August and wage
growth accelerated, strengthening the case for a interest-rate increase from
the Bank of England..."

September 11 - Bloomberg (Laura Humble): "Britain's trade deficit unexpectedly
widened in July as exports fell, diminishing the prospect that trade will contribute
to economic growth this year. The shortfall was 6.33 billion pounds ($11.8
billion)..."

September 11 - Bloomberg (Jonas Bergman): "Swedish unemployment declined in
August as faster economic growth boosted demand for workers... The...jobless
rate fell to 4.6 percent from 5.2 percent in July and 5.5 percent in the same
month a year earlier..."

September 13 - Financial Times (John Authers): "Could central and eastern
Europe be the new powder keg of global emerging markets? The International
Monetary Fund's latest Global Financial Stability report warned that investment
flows to the region could prove unsustainable, and warned of the risk of 'severe
corrections'. It said: 'Current account deficits are large in the Baltics,
Bulgaria, Hungary, Romania, the Slovak Republic and Turkey; fiscal deficits
are high in some other countries such as Hungary; and the ratio of private
sector credit to gross domestic product has risen particularly strongly in
the Baltics, Bulgaria and Slovenia.' According to the latest performance data
from Hedge Fund Research of Chicago, eastern Europe/CIS hedge funds have beaten
all other strategies so far this year. By the end of August, they were up 23.3
per cent, twice the return of any other sector - even energy funds had made
only 11.75 per cent."

September 11 - Bloomberg (Svenja O'Donnell): "Russia's economic growth rate
quickened in the second quarter as the price of crude oil, the country's most
important export, rose to records. Gross domestic product rose 7.4 percent
after a 5.5 percent increase in the previous quarter..."

September 11 - Bloomberg (Steve Bryant): "Turkey's economic growth accelerated
to 7.5 percent in the second quarter as domestic and government spending drove
expansion in the construction and manufacturing industries."

September 14 - Bloomberg (Nasreen Seria): "Sub-Saharan Africa's economy will
probably expand 6.3 percent next year, the fastest pace in more than three
decades, boosted by higher output from oil-exporting countries such as Angola,
the International Monetary Fund said. Growth in the region is forecast to reach
5.2 percent this year..."

September 12 - Bloomberg (Tasneem Brogger): "Iceland's unemployment rate dropped
to 1.2 percent in August, the lowest since October 2001, a sign the labor market
is tightening even after the central bank raised borrowing costs to a record."

September 13 - Bloomberg (Madelene Pearson): "Australia, the world's biggest
shipper of coal and iron ore, increased minerals and energy exports by 32 percent
to a record in fiscal 2006... Export sales rose to A$90.5 billion ($67.9 billion)
in the 12 months ended June 30..."

Latin American Boom Watch:

September 14 - Bloomberg (Heather Walsh): "Latin American and Caribbean economies
will expand more quickly this year than previously forecast, fueled by rising
domestic spending and demand for commodities exports, the International Monetary
Fund said. Argentina and Venezuela will lead a 4.8 percent expansion this year...
Growth will compare with the IMF's 4.3 percent forecast made in April..."

September 12 - Bloomberg (Patrick Harrington): "Mexico's industrial production
rose more than 5 percent for a third straight month in July as automobile manufacturers
increased output for export. Production rose 5.8 percent from a year earlier..."

September 12 - Bloomberg (Valerie Rota): "Barclays Capital, one of six banks
granted a license this year to operate in Mexico, plans to begin issuing and
trading bonds based on mortgage loans, amid an expanding market for mortgage-backed
bonds..."

September 14 - Bloomberg (Eliana Raszewski): "Argentina's economy expanded
at the slowest path in two years in the second quarter. Gross domestic product...grew
7.9 percent in the second..."

September 12 - Bloomberg (Guillermo Parra-Bernal): "Cuba's economy grew a
faster-than-expected 12.5 percent in the first half of 2006, boosted by a surge
in the construction, transport and services industries... This year the economy
is likely to attain a second straight year of growth exceeding 10 percent as
local investment and proceeds from exports such as nickel and sugar cane boost
government coffers and workers' incomes..."

Central Banker Watch:

September 12 - Bloomberg (Matthew Brockett and Andreas Scholz): "European
Central Bank council member Nicholas Garganas said economic growth and inflation
may prove even stronger than forecast by the bank and suggested he sees scope
to keep raising interest rates. 'There is still a considerable amount or degree
of monetary accommodation which needs to be withdrawn.' He 'would not be surprised'
if both inflation and growth were in the upper part of the ECB's new forecast
ranges this year and next."

September 14 - Bloomberg (Alice Ratcliffe): "The Swiss central bank raised
its main interest rate for the fourth time in a year to prevent the fastest
growth since 2000 fueling inflation in Europe's eighth-largest economy. The
Swiss National Bank increased the three-month Libor target by a quarter point
to 1.75 percent."

September 14 - Bloomberg (Tasneem Brogger): "Iceland's central bank raised
the benchmark interest rate to a record 14 percent as it seeks to cool inflation
that stands at three times its target."

September 14 - Bloomberg (Kim Kyoungwha): "Central banks, under growing pressure
to increase returns from investments of foreign exchange reserves, plan to
diversify out of government bonds, Bank of Korea's deputy governor Rhee Yeung
Kyun said. 'Non-government securities with higher risk and non-traditional
profiles are no longer out of bounds,' Rhee said at a conference on management
of reserves, hosted by the World Bank and Bank of Korea..."

Bubble Economy Watch:

The July Trade Deficit was up 17% from one year ago to a record $68.04 billion.
Goods Imports were up 15% from July 2005 to a record $159.1 billion. Exports
were up 14% y-o-y to $85.7 billion. Over two years, Imports have increased
29% and Exports 27%.

August Retail Sales were up 6.8% from a year earlier, with Sales Ex-Autos
up 7.7%. August Import Prices were up 6.6% y-o-y. Initial Jobless Claims declined
to 308,000, a 7-week low.

September 12 - Dow Jones (John McAuley): "Companies plan to increase hiring
at a slightly slower rate in the fourth quarter of 2006, but foresee net hiring
remaining near the same rate that has prevailed for the past year... Of nearly
14,000 employers interviewed, 28% indicated they actually intend to increase
hiring in the second quarter, while only 8% indicated they planned to reduce
staff in the latest Manpower, Inc. survey..."

September 12 - Bloomberg (Adrian Cox): "Goldman Sachs Group Inc... said it
set aside as much as $542,000 in pay per employee for the first three fiscal
quarters, already beating the total for the whole of last year. Goldman said
today it provided $13.9 billion in compensation for its 25,647 employees..."

September 14 - Bloomberg (Chris Dolmetsch): "The New York City Taxi & Limousine
Commission may raise the average cab fare by almost $1, or about 11 percent..."

Real Estate Bubble Watch:

September 15 - EconoPlay.com (Gary Rosenberger): "The housing freefall picked
up speed in August as buyers either stood in the wings with visions of an impending
fire sale or were frightened off by the harsh media spotlight on the market,
say residential builders. Builders took extra steps to engage buyers with new
come-ons, like a free car in the garage, effectively decreasing new home valuations
- but buyers seemed determined to hold out for something more Maserati than
Mini Cooper... If there is one emerging pattern, it's that the largest builders
are suffering a disproportionate share of the pain just as they were inordinately
rewarded during the boom. Smaller custom builders seem better able to adjust.
Some are doing just fine in the remaining strong pockets or in markets that
were overlooked during the upturn, where business is up. All builders, but
for a few specializing in multimillion dollar homes, face reluctant or scared
buyers."

September 13 - Bloomberg (Kathleen M. Howley): "U.S. foreclosures begun on
prime adjustable-rate mortgages rose to a four-year high in the second quarter,
a sign more homeowners with good credit ratings are having trouble paying their
bills. The share of the loans entering foreclosure...climbed to 0.27 percent
at the end of June, the highest since 2002's third quarter..."

September 12 - Bloomberg (James R. Hagerty): "A continued rise in inventories
of unsold homes in August is likely to put more downward pressure on home prices
in many parts of the U.S. Inventories of homes in 18 large metropolitan areas
across the country expanded by 4.7% in August from a month earlier, according
to...ZipRealty Inc.... The biggest increases -- 16% in the Dallas area and
13% in Seattle -- came in markets that have been relatively strong recently.
A sharp rise in inventories in those areas is likely to help restrain price
increases. Other sizable increases came in Orlando, Fla. (8%), San Francisco
(6.1%) and Miami (5.6%)."

September 13 - Bloomberg (Peter Woodifield): "Global investment in real estate
may increase 26 percent to $600 billion this year, fueled by companies such
as private equity firms seeking higher returns, according to Jones Lang LaSalle
Inc. In the first half, spending on property climbed 30 percent to $290 billion...
The money invested in the Americas gained 27 percent to $129 billion, while
the value of transactions in Germany and Japan more than doubled."

Financial Sphere Bubble Watch:

September 11 - Financial Times (Gillian Tett and Paul J Davies): "Hedge funds
have quietly gobbled up record amounts of ultra risky corporate instruments
in Europe in recent months... According to data compiled by Credit Suisse...,
in the second quarter of this year almost $3.8bn of 'payment in kind' (PIK)
notes - a type of high-risk, high-return instrument - were sold to investors
by private equity-owned companies. This is equivalent to a quarter of all the
high-yield bonds issued in Europe..."

September 11 - Financial Times (Stefan Wagstyl): "Russia plans a massive increase
in the scale of its exports of oil and gas to Asia in its quest to expand its
political and economic role as a global energy supplier, Vladimir Putin has
said. According to the Russian president, it plans to export 30 per cent of
its oil and gas to Asia in 10-15 years compared with 3 per cent today."

Climate Watch:

September 14 - Bloomberg (Margot Habiby): "The continental U.S. endured the
hottest summer since the Dust Bowl of the 1930s, and the second-warmest since
recordkeeping began more than a century ago, U.S. forecasters said..."

September 13 - Associated Press: "Wildfires across the country have scorched
more land in 2006 than in any year since at least 1960, burning an area twice
the size of New Jersey... As of Wednesday, blazes had torched 8.69 million
acres, or 13,584 square miles... Federal officials attributed the increase
to two consecutive seasons of hot and dry weather that left forest and ranges
parched and easily ignited by lightning."

September 15 - Bloomberg (Michael Heath): "Russia, the world's fourth-largest
wheat producer, harvested 15 percent less grain as of Sept. 1 than at the same
time last year, after a drought in some regions of the country."

Speculator Watch:

September 13 - Bloomberg (Darrell Hassler): "Hedge fund trading of bonds and
derivatives in the U.S. more than doubled in the past year, giving them so
much influence that some markets can't operate efficiently without them, according
to Greenwich Associates. Hedge funds accounted for 45 percent of annual
trading in emerging-market bonds, 47 percent of distressed debt and 55 percent
of credit derivatives in the 12 months ended March 30, Greenwich said... Over
the same period, overall trading in bonds and derivatives rose 25 percent..."

September 15 - Bloomberg (Matthew Keenan): "Stanford University's endowment
fund, the third-biggest among U.S. higher-education institutions, rose 19.4
percent this year, led by international stocks, and real estate and energy
investments. The returns helped increase assets to $15.2 billion as of June
30..."

Fiscal Watch:

After 11 months of the fiscal year, federal receipts are running 11.7% ahead
of fiscal 2005. Individual Income Tax Receipts are up 12.4%, and Corporate
Income Receipts are 29% ahead. Total Spending is running 7.6% ahead of last
year, with Social Security up 4.7%, National Defense 6%, Medicare 13.7%, Interest
22.2%, and Health 1.5%.

Monetary Disorder Watch:

Goldman Sachs reported third quarter Net Income of $1.594 billion, down 1%
from the year ago period. Net Revenues were up 2% to $7.463 billion. Nine-month
Revenues were up 51% from comparable 2005 to $27.90 billion, with Net Earnings
up 60% to $6.385 million. "During the third quarter, Goldman Sachs surpassed
its previous annual record for net revenues... Fixed Income, Currency and Commodities
(FICC) generated its third highest quarterly net revenues of $2.74 billion.
Assets under management increased to a record $629 billion, 21% higher than
a year ago, including net asset inflows of $30 billion during the quarter." Investment
Banking Net Revenues were up 27% to $1.29 billion. Financial Advisory Net Revenues
were up 9%... "Net revenues in the firm's Underwriting business were $679 million,
49% higher than the third quarter of 2005. Net revenues were significantly
higher in debt underwriting, primarily due to an increase in leveraged finance
activity and equity underwriting." Compensation & Benefits Expense declined
slightly y-o-y to $3.51 billion. Goldman repurchased 3.8 million shares during
the quarter, with the board authorizing the repurchase of an additional 60
million shares.

Lehman Brothers' third quarter Net Income of $916 million was up 7% from the
year ago period. Nine month Net Income of $3.0 billion was up 26% from comparable
2005. Net Revenues of $4.2 billion were up 8% from Q3 2005. Capital Markets
Net Revenues were up 13% to $2.8 billion ("third highest quarter ever"), with
Fixed Income Capital Markets Revenues up 6% to $2.0 billion. Investment Management
Revenues were a record $605 million, up 18%. Assets Under Management were up
26% from a year earlier. Investment Banking Revenues declined 11% to $726 million.
Compensation & Benefit Expenses were up 8% to $2.06 billion, or almost
half of Net Revenues. For the first nine months of the year, Principal Transaction
Revenues were up 21% from comparable 2005 to $7.183 billion. Company Total
Assets expanded $18.8 billion during the quarter, or 16.5% annualized, to $475
billion. Assets were up 23.6% y-o-y, with a two-year gain of ($134.1bn) 39.3%.

Bear Stearns reported third quarter Net Income of $438 million, up 16% from
the year ago period. Net Revenues were up 17% y-o-y to $2.1 billion. Highlights
included: "Institutional Equities net revenues were $436 million for the third
quarter...a 31% increase... Fixed Income net revenues were $878 million...up
19%... Wealth Management net revenues for the quarter...were $231 million,
an increase of 36%... Investment Banking net revenues were $232 million...down
23%..." Principal Transactions Revenues were up 23.9% y-o-y during the quarter
to $1.093 billion. Employee Compensation and Benefits Expense was up 20.4%
y-o-y to $1.025 billion.

Today's CPI report was just right (ignoring, that is, the troubling 3.8% y-o-y
gain). Recent market behavior has been, for most, better than just right. With
oil and gold in rapid retreat and down significantly from earlier highs, talk
returns to Goldilocks and her latent global dis/deflationary pressures. Certainly,
the prevailing policymaker and bond market view that globalization is a dis-inflationary
phenomenon has been bolstered by recent market trading, as much as I view this
line of thinking dangerously misguided. And, no doubt about it, those of the
bullish persuasion will get all bullied up by recent market action. Yet, examining
a most extraordinary environment, I do see ample evidence supporting a rather
Un-Goldilocks view of Intensifying Monetary Disorder.

The New Zealand dollar jumped better than 4% this week. The "Kiwi" dollar
is now a notable 12% above its late June lows, although it remains 3% below
where it began the year. Market expectations that 7% (today 7.25%) short-term
interest rates would choke a vulnerable New Zealander economy and incite a
run on its securities markets have not come to fruition. Inflation has also
proved resilient, with central bank Governor Alan Bollard now signaling that
he will be in no rush to lower rates. The Iceland Krona gained 1.5% this week
and has regained a good chunk of the huge decline from earlier in the year.
Iceland's economy, markets and inflation have also demonstrated notable resiliency,
thus far flustering those trumpeting acute fragility. Focusing on global currency
and securities markets, indicators of international liquidity continue to signal
overabundance.

Here at home, the S&P500 Homebuilding index surged 10% this week. The
Morgan Stanley Retail Index (35 companies) jumped 6.1% during the week to reach
a new record high, in the process increasing y-t-d gains to 9.8% (2-year gain
of 39.2%). The S&P500 Supercomposite Restaurants Index jumped 4.1%, increasing
y-t-d gains to 9.3% (2-year gain of 35.1%). The Broker/Dealer index surged
7.4% this week, increasing y-t-d gains to 14.6% (2-year gains of 75.6%). The
NYSE Financial Index (399 companies) jumped 1.9%. The NYSE Financials are up
10.1% so far during 2006, with a two-year gain of 29.8%. Up 2% this week and
8.2% y-t-d, the PHLX/KBW Bank Index is only about 1% off its all-time record
high. The NASDAQ Others Financial Index surged 5.5% this week, increasing y-t-d
gains to 11.8% (2-year gains of 46.1%!). Elsewhere, the Interactive Week Internet
Index jumped 4.9% and the AMEX Airline index 6.7%. Making the rather questionable
presumption that market prices are a reflection of future prospects, sectors
that I would expect to offer early indication of economic weakness and/or systemic
liquidity issues are conspicuously indicating neither.

With the stock market's apparent dramatic reassessment of U.S. financial and
economic prospects, one might have expected the bond market to be in hasty
retreat. Nope. Bond yields hardly budged this week and remain significantly
inverted to overnight lending rates. What gives? Last week, I confessed a case
of acute analytical ambiguity-itis, as well as my fear of the market's saunter
into a harrowing Neverland. Well, I suppose only an embittered bear (or, perhaps,
a commodities bull or "market neutral" unicorn) would this week cry out that
the market has completely succumbed to the "Law of the Jungle."

But I'm not really in the mood to snivel. The market environment is what the
market environment is. And it is very much a creation of, as well as contributor
to, the general financial backdrop - one that remains highly speculative and
inflationary. The Broker/Dealers (Goldman, Lehman and Bear Stearns) this week
reported better-than-expected fiscal third quarter results, an especially inspiriting
development considering that they maintained remarkable momentum despite headwinds
from the most challenging market environment in many quarters.

For the first nine months, the three Wall Street firms combined for Net Revenues
of an incredible $47.8 billion, up 37% from comparable 2005. This provides
a valuable reminder that "resiliency" is a defining attribute of contemporary "Wall
Street Finance." As they demonstrated (again) this past quarter, if market
dynamics dictate that particular segments of the brokerage/proprietary trading/securities
financing/investment banking/derivatives/global finance business face tougher
headwinds, it is simply a matter of tacking a bit in another direction. If
one sector or region is struggling, just push the others. If one area of the
market falls somewhat out of favor, simply fashion and offer buyers (increasingly
hedge funds - see "Speculator Watch" above) the type of securities, instruments
and/or derivative products with the return, risk and liquidity profile they
demand. If clients prefer to leverage U.S. or global securities, fine; need
financing to buy companies, no problem; or any complex derivative strategy
- now so easily accomplished. And, importantly, championing booms in the relatively
better performing areas, sectors and regions works to buttress liquidity for
the enjoyment of all (hence, bolstering the lagging - as we witnessed with
market pricing this week).

As long as overall system Credit creation remain robust, there will be overly
abundant liquidity needing to find a home (note the ongoing huge inflows to
Goldman and others' investment management businesses). A case can be made that
one aspect of rising wage inflation is an additional (inflated) amount of finance
directed to various market-oriented retirement accounts. From domestic sources
as well as from abroad (recycling U.S. Current Account Deficits), the Flow
of Finance to the markets appears to be anything but waning. And, all along
the way, enterprising Wall Street proprietary trading desks are the first to
jump on whatever trend they and their clients labor to popularize, creating
only more market liquidity in the process. And don't be surprised if this afternoon's
announcement of Blackstone Group's $17.6 billion takeover of Freescale Semiconductor
marks an acceleration of large private-equity deals - incorporating heavy leveraging
and creating additional liquidity in the process. It is also worth noting that
Goldman, Lehman, and Bear Stearns combined to compensate their employees $23.6
billion during the first three quarter of the year. Has there ever been more
powerful direct incentives to sustain a financial boom?

July's much worse-than-expected and record $68.0 billion Trade Deficit was
completely disregarded by the markets and hardly even garnered a headline.
Ironically, market pundits increasingly adopt the view that inflationary pressures
have abated. Meanwhile, the most prominent Inflationary Manifestation - the
U.S. Trade Deficit - swells to only more ridiculous dimensions. I have argued
for too long that mounting U.S. Current Account Deficits are a consequence
of the U.S. Financial Sphere creating excessive Credit/"purchasing power" and
then directing resultant abundant financial flows to securities and asset markets
(with attendant Financial and Economic Spheres maladjustment). These Monetary
Processes are only reinforced by the Bernanke Fed's abhorrence of popping Bubbles.

I hope readers will connect the dots, although we all know that policymakers
never ever will. Runaway U.S. Financial Sphere excess and attendant massive
U.S. Current Account Deficits are the primary (inflationary) factor spawning
this unparalleled Ballooning Pool of Global Speculative Finance. And it is
this increasingly Unwieldy Reservoir of Capricious Financial Flows and Leveraged
Speculation that is spurring increasingly destabilizing volatility throughout
global currency markets (i.e. New Zealand and Iceland), the emerging markets,
energy and commodities, and U.S. and global bonds and equities.

For this week, at least, the markets can relish in the Tantalizing "Upside" of
the "Law of the Jungle." The energy and commodity bulls were taken out to the
woodshed, while the equities bears suddenly found themselves on the wrong side
of a grisly mauling. The (so-called) "market neutral" players were caught with
their longs sinking almost as quickly as their shorts were spiking, having
few options but to exacerbate the problem (reverse positions). This follows
the recent trampling of the bond bears which, in conjunction with the reversal
of what were likely unusually large speculations throughout the energy complex,
set in motion speculative trading dynamics inciting a domino unwind of inflationary/bearish
positions across a broad swath of markets. What I label "marketplace dislocation" others
celebrate as virtual financial nirvana.

I certainly won't be scurrying to jump on the bandwagon suggesting inflationary
pressures are waning. It is not inflation that is in retreat but, at least
for now, only The Crowd that had placed bets on rising energy and commodities
prices. There are two quite distinct dynamics involved, with destabilizing
speculation, crowded trades and ensuing tumultuous market dislocations all
key marketplace facets of Monetary Disorder. Indeed, the general inflationary
backdrop fosters speculations that will inevitably be unwound. And the longer
rampant Credit Inflation is accommodated the larger the pool of speculative
finance that is allowed to balloon; and the more spectacular the inevitable
dislocations. Worse yet, policymakers have adopted an asymmetric stance of
ignoring asset price inflation while ensuring aggressive reliquefication in
the event of asset price vulnerability. This, as we are again witnessing, significantly
increases the likelihood of marketplace dislocations first erupting on the
upside (speculative buying panics, short-squeezes and derivative-related "melt-ups")

Often, and it has certainly been the case in the bond and equity markets,
liquidity overabundance can lead to speculators getting squeezed in spite of
underlying fundamental trends and prospects. I am reminded of how deteriorating
fundamentals induced heavy shorting of technology stocks during the late nineties,
only to have excessive marketplace liquidity ensure a spectacular squeeze that
took NASDAQ for quite a ride - that is, until it collapsed. Major squeezes
can be significant developments with regard to inciting speculation and liquidity
creation, working to exacerbate Monetary Disorder.

I suggest this evening that we analyze sinking energy and metals prices -
along with spiking equities (homebuilders, retailers, financials, etc.) and
bond prices - within the context of heightened Monetary Disorder. Market pricing
mechanisms - especially those distorted by highly speculative marketplaces
- are these days unusually susceptible to bouts of mis-pricing. The general
backdrop remains one of extraordinarily abundant liquidity at home and abroad
- liquidity supportive of bond prices within a backdrop where housing vulnerability
has basically taken the Fed out of the equation. I certainly don't believe
lagging energy and commodities markets are today reflective of the robust inflationary
biases that permeate global economies. Contrarily, I would expect quiescent
bond markets these days to be conducive to continued Credit excess and attendant
heightened inflationary pressures.

If I thought that lower energy and commodities prices might cool sector borrowing
and spending excesses, I would take recent market trends more seriously as
a reflection of general liquidity a nd inflation trends. But a key aspect of
Acute Systemic Monetary Disorder is the rolling nature of sector booms and
price Bubbles. It is almost as if one can just pick an area and sit back and
wait for the inevitable boom for easy enrichment. The perceived risk vs. reward
of chancy endeavors becomes too enticing to resist. It is this Inflationary
Psychology that leads to rolling spending booms - certainly including technology,
housing, energy, capital goods, exports, healthcare, education, government,
etc. - that ensure a Credit-induced Bubble Economy operates at near capacity.
Today, lower energy prices, lower market yields, and inflated stock prices
will most likely provide general stimulus.

September 14 - Bloomberg (Andreas Scholz and Chris Malpass): "Hans Tietmeyer,
who headed Germany's Bundesbank when it still set the pace for interest rates
around Europe, comments on inflation, interest rates and the outlook for economic
growth in the U.S... 'We can't exclude a hard landing in the U.S., this
is a threat to the economic outlook for 2007.' On currencies: 'We see a
considerable exchange rate risk. That's going to be an issue in Singapore
now [during the G7 meeting]. We can't control exchange rates, we have
to coordinate policy. The biggest risk is: how long will Asians prefer to
invest in U.S. dollars?' On inflation: 'I still see considerable potential
for inflation because of the continuing expansion in money supply. Not enough
of this has been absorbed yet. Second-round effects are still limited, but
it's not over yet. And inflation expectations are very unstable. Monetary policy
is not restricting growth, and remains clearly accommodative, there's no question
of that. Real interest rates are still low.'"

The market impact of the recent unwind of some commodities and bearish bets
is absolutely inconsequential compared to the crisis that will be initiated
when Monetary Disorder eventually leads to a scramble (and de-leveraging) out
of bursting U.S. and global securities markets Bubbles. Hopefully, this episode
does not involve myriad highly inflated Bubbles all bursting simultaneously
across the globe, although the nature of current Monetary Disorder would appear
to support just such an outcome. If the Bernanke Fed is relieved by - or perhaps
even celebratory of - the decline in energy and commodity prices in conjunction
with gains in stock and bond prices, I suggest to them that they should instead
be extremely concerned with the unprecedented degree of speculation in U.S.
and global securities markets. Rampant and unmanageable Credit Inflation and
its myriad effects remain their chief worry. As such, a speculative run in
U.S. equities would essentially culminate Monetary Disorder's worst-case scenario.